Question

​Bid/Ask on Aussie Dollar Forward. Use the following spot and forward​ bid-ask rates for the U.S.​ dollar/Australian dollar

​(US$=A$1.00​)

exchange rate from December​ 10, 2010, to answer the following​ questions:

a. What is the midrate for each​ maturity?

b. What is the annual forward premium for all​ maturities?

c. Which maturities have the smallest and largest forward​ premiums?  ​(Click on the

  

icon to import the table into a​ spreadsheet.)

Period	Bid Rate	Ask Rate
spot	0.98490	0.98512
1 month	0.98087	0.98123
2 months	0.97765	0.97802
3 months	0.97423	0.97470
6 months	0.96331	0.96377
12 months	0.94198	0.94280
24 months	0.90137	0.90262

Answer 1

Mid rate = (Bid rate + Ask rate) / 2

Spot Mid rate = (Spot Bid rate + Spot Ask rate) / 2

Spot mid rate = (0.98490 + 0.98512) / 2

Spot mid rate = 0.98501

1 month Mid rate = (1 month Bid rate + 1 month Ask rate) / 2

1 month mid rate = (0.98087 + 0.98123) / 2

1 month mid rate = 0.98105

2 month Mid rate = (2 month Bid rate + 2 month Ask rate) / 2

2 month mid rate = (0.97765 + 0.97802) / 2

2 month mid rate = 0.977835

3 month Mid rate = (3 month Bid rate + 3 month Ask rate) / 2

3 month mid rate = (0.97423 + 0.97470) / 2

3 month mid rate = 0.974465

6 month Mid rate = (6 month Bid rate + 6 month Ask rate) / 2

6 month mid rate = (0.96331 + 0.96377) / 2

6 month mid rate = 0.96354

12 month Mid rate = (12 month Bid rate + 12 month Ask rate) / 2

12 month mid rate = (0.94198 + 0.94280) / 2

12 month mid rate = 0.94239

24 month Mid rate = (24 month Bid rate + 24 month Ask rate) / 2

24 month mid rate = (0.90137 + 0.90262) / 2

24 month mid rate = 0.901995

Forward premium for 1 month = (1 month mid rate - Spot mid rate) / Spot mid rate

Forward premium for 1 month = (0.98105 - 0.98501) / 0.98501

Forward premium for 1 month = -0.40%

Annualizing the 1 month forward premium = Forward premium for 1 month * 12

Annualizing the 1 month forward premium = -0.40% * 12

Annualizing the 1 monthforward premium = -4.8%

Forward premium for 2 month = (2 month mid rate - Spot mid rate) / Spot mid rate

Forward premium for 2 month = (0.977835 - 0.98501) / 0.98501

Forward premium for 2 month = -0.7%

Annualizing the 2 month forward premium = Forward premium for 2 month * 6

Annualizing the 2 month forward premium = -0.7% * 6

Annualizing the 2 month forward premium = -4.2%

Forward premium for 3 month = (3 month mid rate - Spot mid rate) / Spot mid rate

Forward premium for 3 month = (0.974465 - 0.98501) / 0.98501

Forward premium for 3 month = -1.07%

Annualizing the 3 month forward premium = Forward premium for 3 month * 4

Annualizing the 3 month forward premium = -1.07% * 4

Annualizing the 3 month forward premium = -4.28%

Forward premium for 6 month = (6 month mid rate - Spot mid rate) / Spot mid rate

Forward premium for 6 month = (0.96354 - 0.98501) / 0.98501

Forward premium for 6 month = -2.18%

Annualizing the 6 month forward premium = Forward premium for 6 month * 2

Annualizing the 6 month forward premium = -2.18% * 2

Annualizing the 6 month forward premium = -4.36%

Forward premium for 12 month = (12 month mid rate - Spot mid rate) / Spot mid rate

Forward premium for 12 month = (0.94239 - 0.98501) / 0.98501

Forward premium for 12 month = -4.33%

Annualizing the 12 month forward premium = Forward premium for 12 month * 1

Annualizing the 12 month forward premium = -4.33% * 1

Annualizing the 12 monthforward premium = -4.33%

Forward premium for 24 month = (24 month mid rate - Spot mid rate) / Spot mid rate

Forward premium for 24 month = (0.901995 - 0.98501) / 0.98501

Forward premium for 24 month = -8.43%

Annualizing the 24 month forward premium = Forward premium for 24 month * 0.5

Annualizing the 24 month forward premium = -8.43% * 0.5

Annualizing the 24 month forward premium = -4.21%

Th forward premoum is the highest for 2 month (-4.2%) & the lowest for 1 month (-4.8%)